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The Importance of Site Inspections in Income Property Lending

In the realm of income property lending, site inspections play a crucial role in mitigating risks and costs, especially considering the high price of formal property appraisals. Understanding the process and importance of site inspections can be beneficial for lenders, borrowers, and real estate professionals.

High Cost of Income Property Appraisals

Expensive Appraisals: Income property appraisals can be notably costly, with prices around $5,000 not being uncommon.

Regulatory Requirements: Federally related lenders are required by federal regulations to order their own appraisals. This means that if one lender's appraisal is rejected, another lender will have to commission a new appraisal, incurring additional costs.

Advantages of Site Inspections

Cost-Effective Pre-Assessment: Conducting a site inspection before ordering a full appraisal can prevent unnecessary expenses.

Gathering Essential Information: Site inspections provide essential details needed for proposal submission packages, including digital photographs and a general assessment of the property and its surroundings.

Conducting Site Inspections

Local Assistance: If the property is beyond your personal reach, it's advisable to arrange for a local professional to conduct the inspection. This can involve a small fee (e.g., $50) for digital photos and a brief report.

Choosing the Right Person: It's recommended to use local appraisers, realtors, real estate brokers, or even acquaintances for an unbiased perspective.

Focus of the Inspection: The inspection should cover frontal photographs of the property, street scenes, and an evaluation of the socio-economic nature of the area.

Why Borrowers Shouldn't Take Photos

Risk of Losing the Deal: Asking borrowers to take photographs often leads to delays and a potential loss of interest in the loan, as the borrower might procrastinate and simultaneously develop negative perceptions about the loan process.

Need for Independent Assessment: Even if the borrower provides photos, an independent third-party assessment of the area's socio-economic status is still necessary.

Legal Considerations for Lenders

Avoiding Illegal Fees: If you decide to conduct the inspection yourself, it's important not to charge the $50 site inspection fee, as this could be considered an illegal advance fee and endanger your real estate license.

Site inspections are a vital yet often overlooked aspect of income property lending. They offer a cost-effective way to gather essential information about a property, reducing the need for expensive appraisals. By strategically planning and conducting these inspections, lenders can streamline their lending processes, maintain regulatory compliance, and make informed decisions about property loans.